Price Elasticity of Demand and Health Care

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Running Heading: Price Elasticity and Health Care

Price Elasticity of Demand and Health Care

Table of Contents

II. Introduction

III. Measure of Health Care Demand

IV. Price Elasticity of Demand for HealthCare

V. RAND Study

VI. Health Care Trends in 2007

VII. Summary

The Health Care System in the U.S continues to be a topic of debate as the cost for

health care continue to grow. Many Americans are being forces to change the way they use the

health care system as the costs rising faster than their income. More than 6 in 10 Americans with

health insurance coverage indicate that the costs they are responsible for paying under their plan have

increased in the past year. This paper examines the elasticity of demand for health care


Measure of Health Care Demand
The demand for health care is often measured by the quantity of services used such as the number of doctor visits, prescriptions filled or inpatient hospital stays. The demand is also measured by the total costs of the services. The cost of health care for the consumer usually depends on the amount of premiums, deductible, and coinsurance or copayments that they are required to contribute. The amounts can vary and this can make it difficult to estimate the price elasticity of demand for health care services. In order to gage the effect of price changes, the researcher would need to determine the effective price that a consumer is willing to pay for an additional unit of health care services. Elasticity of Demand for Health Care

The price elasticity of demand measures the percentage change in quantity demanded

resulting from a 1 percent change in price. The elasticity of demand for a product or service will

vary depending on the level of price and quantity at which it is evaluated. The elasticity of

demand can vary depending on the different combinations of price and quantity demanded. As

the norm, the price elasticity of demand will always be negative. This indicates that the

consumer will demand less of the service or good as the price increase all other factors held

constant. The demand for health care has been consistently found to be price inelastic due to the

few close substitutes for medical services. The range of price elasticity it tends to be around –

0.17, meaning that a 1 percent increase in the cost of health care will lead to a 0.17 percent

reduction in health care expenditures. Studies show that the demand levels decrease as the levels

of cost sharing decrease. Some types of services such as pharmacy and preventative care

benefits are tend to have higher price elasticities since there are other goods or services that can

serve as substitutes. As a result, the consumer is able to move toward substitute services or

goods as the price increases.

The demand for health care is also considered to be income inelastic. The estimates of income

elasticity of demand are in the range of 0 to 0.2. This measure indicates that as income

increases, the demand for health care services increase as well. The demand for health care can

also be affected by the services being offered by a particular health plan. The variation of out-of-

pocket expenses for services or premiums can impact the number of plan enrollees and the

demand for health care services paid for by that plan.

RAND Study
Between 1974 and 1982, the government, funded a social insurance experiment referred to as the RAND Health Insurance Experiment (HIE). The experience was intended to answer some question pertaining to the demand for health care. Families in six sites were randomly placed into different insurance plans. The plans had different levels of cost-sharing, deductible amounts and out-of-pocket maximums. Although the HIE was conducted decades ago, the results of the studies are considered the...
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